Earnings to pick up in H2; be patient with cyclicals: Kotak

A: What you are saying is right. You can call it whatever but it is ultimately lag of earnings, which is dragging the markets. I think it is a combination of valuations -- little bit on the high side -- and lag of earnings that we had in last quarter. I don’t expect the earnings pick up in this quarter also in a big way. So that is the reason primarily why the Indian market is in a way consolidating, which is not a bad thing itself.

If you look at last one year, it has been a great ride for both midcaps and largecaps so you need a bit of a consolidation in the market before you resume on the next leg. So I think we should be in that phase for possibly not two weeks, possibly little more than that before we see earnings pick up again in the second half of the year.

Latha: What is the sense you are getting though as to who is doing the selling? Almost everyday we are getting positive FII equity numbers, what are the funds telling you since you are so much in touch with them? They don’t seem to be selling out, is this just a domestic trader sell-out and therefore is it likely to be a shallow correction?

A: It is very difficult to pinpoint who is selling but the media reports suggest that there is a lot of profit taking, which is happening at this point of time. So it is difficult to figure out who is selling but I am just back from US meeting up with clients there. The kind of engagement that clients are having now on India is far higher than what it was previously.

A lot of very difficult-to-get clients – endowment funds, pension funds -- are talking about single-country exposure to India rather than going through emerging markets (EM) route. So this is big change from past.

I would tend to believe yes, there are issues on valuation everyone has that but I don’t think that the foreign investor is looking to sell in the hurry but as I said, it is very difficult to pinpoint in India who is selling. Possibly, it is a year-end phenomenon, possibly we will see this selling continuing till the end of this week if it is just an year-end phenomenon.

But I would say it is a good time to build a quality portfolio. If you want to build over the next one-two months, I don’t see even after this bout of selling is over that we will see a pick up in the market in a big way because ultimately market is going to be driven by earnings and till we see that we may consolidate a little bit more than this last two weeks also.

Sonia: Are you selling because I was going through your own portfolio, you still have about 30 percent exposure to the banks and given that bank earnings have been far from impressive, are you reducing your weightage in this sector?

A: This quarter has not been very kind to us but I think we will hold on to our positions. We don’t see any big issue in banking sector on a longer-term basis or in a medium-term basis. Yes there is this quarter where there will be some bit of profit booking taking which has happened.

Clearly, this is a quarter where there has been a significant shift of money into consumers possibly IT, pharmaceuticals and cylical stocks have taken a backseat. We are not looking to change our portfolios meaningfully unless and until we have a longer-term view which has changed. I don’t see any change in that view -- in the short-term possibly we will have to walk through this pain a little bit but not looking to change our portfolios in a meaningful way at this point of time.

Latha: You said that this is a great time to build quality stocks, to the extent you can speak about stocks, what would you point out as quality stocks or the nearest you can come to giving us some hints?

A: I cannot talk about names but what I would suggest is that in the medium-term outlook, India looks very robust. The long-term story is in fact greater. You look at the macro -- you can pick and choose what looks good to you. There are so many things in macros, which are good. When you look at micro at this point of time which are very little things which are looking good, yes, there is a bit of a data on commercial vehicle sales which is looking good, car sales here or there so good data point, railway freight picked up a little bit, electricity generation data was better but there are very few data points which are positive at this point of time.

When I look at six months down the line, I think there are a lot of things which can happen on the upside. So clearly, from the medium-term perspective, there are a lot of things that you can build your portfolios if you have some use of sectors, which are positive. Infrastructure per se at this point of time is going through a slow patch linked to that will be cement which is going through a very slow patch at this point of time. If one looks out six months or a year in to time, these are good years to look into.

Banking also -- the credit growth has been slow. We have had the issues of NPLs, which are hitting the bank this quarter also. Possible credit growth uptick can happen on the back of the telecom action and coal block auction plus a revival in the economy in the next 12 months and possibly the NPL issue is more or less stabilised after this quarter.

I don’t see any pick up on asset quality happening very fast but big pain should be over if the economy were to stabilise. So you can look at that segment to build out portfolios and there is a wide dispersion of valuation today in various sectors. I would not say quality because quality stocks are already very expensive if one were to look at from a quality perspective but there are lot of sectors that you can have build out your portfolios in a reasonable way in the next quarter or so.

The other interesting bet in our view is that this quarter will be slightly different from expectation perspective. The last quarter there were expectations of earnings, this quarter I don’t think there are any expectations of good earnings. So the expectations going into the earning season is going to be reasonably low.

So I don’t think the market is going to be disappointed if there is going to be weak earnings because the market is already expecting weak earnings. So this is possibly a good thing that the market is running into earnings season with low expectation, possibly lighter positions and that could be positive thing for the market to go into this earnings season.